Agricultural prices depend on both supply and demand,

and this time we'll be looking at supply.

By supply, I mean how much of a product

producers will choose to produce and sell at a particular price.

When the farmer decided to grow this crop of canola,

the expected price was around $430 per ton.

But if the price had been only $250 per ton,

the farmer would've decided to grow wheat

in his field instead of canola.

Lower price, less supply.

Today, I'm going to use canola as my example

agricultural product, but the same principles

apply to any product.

Clearly, the quantity of canola produced depends on the price

that farmers expect to receive.

And the reason for that is that the more canola

a farmer tries to produce, the more it

costs them per unit of output.

This graph shows the total cost for an agricultural product

as the quantity produced changes.

So the total cost, as you can see,

typically increases at an increasing rate.

In other words, the slope gets steeper

as we go to higher quantities of production.

Economists refer to this slope of this line

as the marginal cost.

So the marginal cost is the slope.

It tends to increase as you go into higher

quantities of production.

So let's graph that.

Let's graph the marginal cost.

It's increasing, and there it is.

So the marginal cost tells us how much

it costs to produce one more unit of output,

and it typically is upward sloping like this.

Now, the marginal cost is relevant

because it helps us to decide how much output

should be produced.

To maximize profit, the farmer should

grow the quantity of canola at which the marginal cost equals

the expected price of canola.

So in this graph, I've drawn in the price-- the world price

or the market price of canola-- and at the point where that

crosses the marginal cost curve, I've

drawn a dashed line down to the quantity axis.

And you can see Q*.

Q* is the optimal quantity of canola to produce if the farmer

wishes to maximize profit.

So why is that?

Why does Q* maximize profit?

It's because if the farmer chooses to grow less canola

than Q*, there's an opportunity to make more money

by increasing production because the sale price is greater than

the marginal cost.

On the other hand, if the farmer chooses to grow more canola

than Q*, there's a chance to avoid some losses by reducing

production because the price received is less than

the marginal cost.

He's losing money at the margin.

So a profit-minded farmer will always aim for Q*.

They don't always know where Q* is exactly,

because they can't predict the weather or the market price,

but they can have a good guess.

So the marginal cost curve equals

the supply curve is the point of this slide.

The marginal cost curve indicates the amount

produced at a given price.

But earlier on, I said pretty much

that that was the definition of the supply curve.

The supply curve represents the amount

produced at a given price.

So the marginal cost curve actually

corresponds to the supply curve.

If you know the marginal cost curve,

then you'd know the supply curve.

In this graph, I've just renamed that curve to the supply curve.

And it shows us that the higher the price,

the more of the product that the farmer will

choose to produce and sell.

So in summary, total cost increases at an increasing rate

with higher quantities of production.

And the marginal cost equals the slope of the total cost curve,

and it increases with quantity because slope does.

Now, the marginal cost curve indicates the optimal level

of production at different prices,

and that corresponds to the supply curve.

So all of that adds up to mean that the supply curve is upward

sloping.

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